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Expected and Realized Returns on Stocks with High- and Low-ESG Exposure

In: Risks Related to Environmental, Social and Governmental Issues (ESG)

Author

Listed:
  • Olaf Stotz

    (Frankfurt School of Finance and Management)

Abstract

Empirically, stocks with a good environmental, social, or governance (ESG) rating tend to earn higher returns than stocks with a low rating. In contrast, the expected returns of high-ESG stocks are primarily lower than those of low-ESG stocks. The difference between realized and expected returns in the ESG domain constitutes a puzzle which we will address in this paper. Applying a return decomposition, we find that the puzzle can be explained by discount rate news. We find that discount rates of high-ESG stocks have fallen relative to low-ESG stocks. However, discount rate news does not reflect changes in risk; rather, discount rate news is systematically related to the demand of investors who have ESG preferences.

Suggested Citation

  • Olaf Stotz, 2022. "Expected and Realized Returns on Stocks with High- and Low-ESG Exposure," Springer Books, in: Marielle de Jong & Dan diBartolomeo (ed.), Risks Related to Environmental, Social and Governmental Issues (ESG), pages 59-76, Springer.
    • Handle: RePEc:spr:sprchp:978-3-031-18227-3_6
    DOI: 10.1007/978-3-031-18227-3_6
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    Citations

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    Cited by:

    1. Monia Magnani & Massimo Guidolin & Ian Berk, 2024. "Strong vs. stable: the impact of ESG ratings momentum and their volatility on the cost of equity capital," Journal of Asset Management, Palgrave Macmillan, vol. 25(7), pages 666-699, December.
    2. Ian Berk & Massimo Guidolin & Monia Magnani, 2023. "New ESG rating drivers in the cross‐section of European stock returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(S1), pages 133-162, December.

    More about this item

    Keywords

    Expected returns; Realized returns; Cash-flow news; Discount rate news; ESG; Sustainable investing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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